Jason Stipp: I'm Jason Stipp for Morningstar. After a mildly disappointing December government job report, do we have reason for higher hopes for January's report?

Here with me to dig into that is Morningstar's Vishnu Lekraj. He is an equity analyst in the employment sector. And Bob Johnson; he is our director of economic analysis.

Thanks for joining me, guys.

Vishnu Lekraj: Thanks.

Bob Johnson: Thank you.

Stipp: So this report comes out on Friday. I know that we've talked a little bit about some signs of hope that we'll hopefully see in the January report, now that we've come into the New Year.

I'd like to kick it off and talk a little bit about ADP and what we saw in the ADP report. Bob, are you seeing some signs from ADP that we could have that bump up in January that you're hoping for?

Johnson: Well certainly ADP said we were going to have a good month last month and that turned out to be dead wrong. So, we're little bit more hopeful this month.

They did show job growth again in the ADP report for the month of January--not quite as robust this December, but still a very robust number at 187,000. So, a good number from that report, but again that hasn't tracked the payroll data particularly well lately.

There was one thing in there, though, that I really did like. It showed a pick-up in small business activity, and that's been something that's really been a laggard, and it blends with some of the stuff we've seen from the Fed, where some of the lending standards seem to be softening just a little, and that may encourage the small businessmen just a little bit.

Stipp: Vishnu, ADP hasn't been the best gauge of what's going to happen in the government report. You guys have made that point several times in the past. Is there anything in ADP, though, that you think offers some good signs for what we might see on Friday?

Lekraj: It may not be exactly right, but the trends coming out of the report you can take a look at and formulate kind of what's happening. And it's very good. We've seen a developing trend over the last two months, including this one. You've seen small and medium-size businesses pick up hiring activity. If you chart it out, you can see a good spike over the past two months.

Coupling that with what I have heard from Paychex, which does a lot of payroll processing for small and medium-size businesses, gives me good encouragement, because Paychex has been reporting very good numbers, and they're really encouraged over the next year.

Stipp: Bob, looking at initial unemployment claims over the last few weeks, how might they affect what we see in Friday's report?

Johnson: Well, I think we're going to have good news there on the layoff side of the house. I don't know about the employment side as much, but on the layoff side, the numbers clearly have improved recently. We've seen a little bit of the seasonal factors causing the numbers to yo-yo around a bit, but it's clear that the trend is in the low 400,000s now versus a few months ago, it was in the mid-400,000s. So we've clearly come back down, and with less layoffs that should bode well for the employment report.

Stipp: Do you have anything to add on the layoffs perspective and how companies maybe are keeping more of their workers now?

Lekraj: Definitely. Just one quick thing on the claims: It's gone down, like Bob said, into the low 400,000s. I'd like to see that trend down to 350,000 or in that range. But this is good news that it's been trending down.

In addition, the government puts out a report called the JOLTS (Job Openings and Labor Turnover Survey); this is something that they do with the turnover in the workforce in the U.S. Now, it's delayed by a month, so all we have right now is November's numbers. But when you take a look at what's happening, you can see for the first time over a while that when you look at a worker leaving a company, they are leaving more because they are quitting versus getting laid off.

So, more and more towards the future within the next year or so, you're going to see more quits versus layoffs, which is a very good sign.

Stipp: So you're not going to quit your job if you think that you're not going to be able to find another one. So, I think that says something about sentiment as well.

Bob, you also look at some of the ISM Reports to get some clues about the employment situation, what's that look like?

Johnson: That's from the purchasing manager's surveys, and there are many of those surveys--some of them regional and a big national one.

Certainly, the news out of there has been very good on both the national and the regional front. This week, we had both the services number and the manufacturing numbers look very good on a headline basis. The services was the highest it's been in five years on the overall index, and certainly employment looks pretty good, too. So I'm optimistic from those reports that we'll see a good report this time around.

Stipp: Vishnu, digging in a little bit, after we get the data tomorrow morning, what are some of the things you're going to be looking at specifically in that report to get a gauge on what the atmosphere is like.

Lekraj: I'm going to look in information services, and that sector includes IT or Information Technology. And I'll take a look at how they've been spending, or how they've been increasing their workforce within that sector, because it has been a laggard over the past six months or so.

From what I hear through other companies, through some of the consulting IT services guys, through companies that are spending in IT services, they're really hitting the ground running for this sector, and if it starts to increase, and we start to see more employment within there, that's good news.

Stipp: So this might indicate that businesses are spending in some of these areas--that's certainly a sign of some optimism on their front, too, right?

Lekraj: And that spending is not necessary discretionary. A lot of it has been put off and now it just needs to be done, and businesses don't do this kind of spending over recessions. They do it when they start to feel more confident in a recovery.

Stipp: Okay. Bob, when you get the numbers tomorrow, I know that you like to look at the average hourly wage and the work week and how many hours were there. Obviously you'd be looking at that again. What other things are you going to be taking a look at in tomorrow's report?

Johnson: Obviously we've had weather issues yet again, and so we'll have to look behind the numbers and make sure construction didn't throw things way out of whack or see if the manufacturing numbers look wacky because they had to close the plant because of weather conditions. So I'll be watching that just from a detail in case the numbers have anything fishy going on with them.

Stipp: Are you worried about retail again? I know that was an area they reported last time that was kind of disappointing.

Johnson: It was, and we thought maybe it would be a little bit better. I'm still hopeful this time that retail does look a little better than it has in the past. So that's certainly one number that I'll be watching closely.

Lekraj: Retail has been schizophrenic. It's been up or down, and it's just a hard number to grasp. One thing that I do want to mention, call it the presidential indicator. When you listen to Obama's State of the Union speech last week, he was a lot more optimistic about the economy, which gives you good encouragement that at least he's trying to pound the table or feels more confident saying the economy is stronger than what it's been over the past two years.

Stipp: So, when we're looking at the consensus estimates for tomorrow, I think they're pointing to about 140,000, 150,000 jobs added. Vishnu, does that seem reasonable to you? Are you right in that ballpark? What are you expecting?

Lekraj: I think it's going to be a little less. When I put the numbers in my model, I get a range of between 110,000 and 130,000. That's private-sector employment. I'm not going to venture to say what government is going to do. They'll do whatever they want to do, but as long as private-sector grows solidly, it's going to be good news.

Stipp: Bob, you mentioned to me that this is an important report this time around. Can you give me a little insight on why you think it's so important, and also, what you're expecting for the numbers?

Johnson: Absolutely. I'll start with the numbers first. I'm a little more optimistic. I'm thinking 150,000 to 200,000. I think everybody's kind of shell-shocked from last month's bad numbers, and everybody's hedging their bets and keeping the numbers low right now. I'm going to go out there on a long limit and say 150,000 to 200,000 based on ADP and ISM reports.

I am more focused on employment reports now. If you recall, for years, I've said ignore those, they're laggards, pay attention to spending. But this time around and over the next three or four months, the employment report is the report to watch; not manufacturing, not exports, not even what's going on in Egypt. I think what's really important is what happens on the employment front, because the consumer has had a very good spending quarter in the December quarter, but the spending has exceeded their incomes.

Now, this month and quarter is payback time, and we need to see employment and wages and hours go up, so they have the wherewithal to continue that type of spending here in the first quarter. So, this is a critical report. You can't put too much weight on any one report because it's subject to revision and so forth, but the next three months of employment reports are the data to watch.

Stipp: All right, guys. I'll look forward to checking in on the actual numbers with you tomorrow. Thanks for joining me today.